How Chinese Education Giants Deal with Regulatory Crackdown

Consumer Discretionary Author: Yuchen Fu Editor: Luke Sheehan Sep 01, 2021 05:09 PM (GMT+8)
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The regulatory storm is distorting the development of K12 education platforms.

Empty seats

Fueled by China's excessive competition in education, the online afterschool tutoring market grew rapidly during the pandemic. Armed with over CNY 53.9 billion in venture financing in 2020 (year-on-year growth of 267.4%), top companies in the space have been spending huge amounts on marketing. Meanwhile, the unhealthy obsession with tutoring made it difficult to sort out the wheat from the chaff based on exam grades. Facing fierce competition, schools and colleges lifted the bar for examination, which perpetuated a vicious cycle.

Owing to the accelerating education monetization and following unhealthy pressure on the younger generations, in June 2021, the national authorities announced the 'Double Reduction' policy designed to equalize education resources countrywide. 

After the new regulations were first published, the total market cap of the segment's China Concepts Stocks slumped from over USD 100 billion at the January peak to USD 23 billion on July 29, 2021 (a decline of 78%). The crackdown had a detrimental impact on the industry, especially on the top off-campus training institutions like New Oriental (EDU:NYSE) and Gaotu Techedu (GOTU:NYSE). To stay afloat, these education giants have been forced to undergo a business transformation, introducing new growth strategies integrated with the changing market environment.


New Oriental

Founded in 1993 and known as the largest provider of private educational services in China, New Oriental offers a diversified portfolio of programs such as foreign language training and all-subjects afterschool tutoring. Facing fierce competition amid the COVID-19 pandemic, it has accumulated over 64.9 million student enrollments, including about 10.6 million in the fiscal year 2020 (year-on-year growth of 26.2%).

With some investors turning bearish, by July 26, the company's share price declined by 87% compared to the beginning of this year, while CNY 199 billion has evaporated from its market cap. Additionally, as per New Oriental's quarterly financial report in Q1 2021, its K12 business has reached 70% of the total revenue.

Losing the main business segment, some of the previous growth strategies, such as its OMO (Online Merge Offline) model, might be no longer optimal for New Oriental. Besides, expanding businesses in line with national regulations, the company has been contemplating a pivot to new fields, including parent training courses, adult vocational education and public services.

Shifting demand to parents of children from kindergarten through twelfth grade, New Oriental has been exploring new opportunities in family education, emphasizing the importance of parenting methods and the education environment. It has recently launched 'all-around education growth centers' (link in Chinese) in Beijing, Hangzhou and other cities. These locations not only offer numerous diversified subjects for children, like art, computer programming, Chinese calligraphy and sports, but also include the 'Quality Parents Wisdom Hall' that provides multi-dimensional knowledge on parenting. Along with its expanding product scope, vocational education for adults has become a transformation target in the eyes of New Oriental as well. As early as last year, the company established a university business department and New Oriental Wuyou, integrating its adult training business.

Gaotu Techedu

Gaotu Techedu, established in 2014, has become one of the largest online afterschool tutoring service brands in China. Covering its K12 business by Gaotu Classroom, the edutech company has renamed the original adult training by Gaotu Academy and launched Gaotu Singularity Research Institute. In 2020, Gaotu's net revenue reached CNY 7.1 billion, up a staggering 236.9% compared with CNY 2.1 billion in the fiscal year 2019.

With nearly 70% of revenue generated by K12 online tutoring services, the company's dependence on the K12 business soon manifested through a vertiginous stock price fall after the regulatory crackdown. Apparently related to its maximum fine (CNY 500,000) for the false advertising and pricing frauds, the drop in the NYSE-listed education firm's share price was even more exaggerated than those of its peers.

Facing strict regulations, Gaotu has quickly started its transformation. With a significant headroom for penetration growth shown by the low proportion (less than 10%) of its vocational business revenue, the company attempted to establish a new revenue source by focusing on adult vocational education. As part of the official policy implementation, in July 2021, it launched Gaotu Campus and Gaotu app, gathering professional qualification examinations, language training, family education and other services.

This move wasn't sudden. Since its inception, the company has been seizing fresh business opportunities in the field of vocational education, maintaining its competitive edge and steady position in the market. Being confronted with personalized demand from adults, the teaching quality and flexibility will be key in achieving further progress. With an online live large-class format to deliver its adult training courses, Gaotu announced that it would focus on developing online live broadcasts of large class products and services, including online meeting formats and online study rooms.

Others players

Yuanfudao, one of China's highly valued edutech startups, took the lead in the transformation of quality education. On July 28, the company launched the 'Pumpkin Science' for children aged 3-8, aiming to cultivate kids' scientific quality and enable them to explore science hands-on with AI-powered interactive content. This move was in line with a key business direction – the STEAM science education, an acronym for science, technology engineering, arts and mathematics.

Unlike others who mainly seize opportunities in the field of adult education and quality education, ByteDance's Dali Education has been exploring the combination of teaching aids and programming software by creating numerous K12 toys and programming apps. Moreover, Dali Education has laid out a position in the smart hardware market earlier by launching the Dali Smart Home Education Lamp, and is currently developing a 'smart screen.'

The Chinese education market's explosive development has long been in the limelight. As the industry cycle is verging to a close, the market shakeups present new opportunities.